Cable’s Quiet Growth Pump

Author:
Publish date:

Although it has a much lower profile than the core residential business, cable’s commercial-sales units are poised to maintain double-digit revenue growth in years to come, executives say. New technologies and savvier sales pitches are being counted on to continue delivering strong growth in a business that now totals about $1 billion in annual revenue.

At a time when basic-cable subscriber counts are going backwards and residential high-speed Internet growth is leveling off, any new growth sector for cable will be welcomed on Wall Street.

'POTENTIALLY HUGE’

“We have always maintained that this is a potentially huge market for cable,” said Bear Stearns & Co. analyst Ray Katz, who singled out commercial services as a bright spot for cable during a panel session at last month’s Cable & Telecommunications Association for Marketing Summit in Boston.

But revenue from business customers isn’t something many market watchers have even factored into their cable forecasts.

And cable still has some work ahead of it. To succeed, Katz said, “You have to build a shadow organization, with dedicated sales, technical and operational staffs. You have to have management that deals with just commercial services.”

The latest technology that brings a smile to the faces of commercial-sales executives is voice-over-Internet protocol telephony, or VoIP.

Cox Communications Inc., Time Warner Cable, Comcast Corp. and Charter Communications Inc. executives all see big potential upside in rolling out VoIP to businesses in the form of attractive voice, data and even video bundles.

Wireless technology is another intriguing entry into the commercial services business, with plant extensions for hard-to-reach offices and Wi-Fi access points for end users.

Cable’s talent level on the commercial-sales side also has improved. Charter, for example, has formed teams of specialists to focus on key sectors — like education, medical, government and retail institutions — to drive further business.

Cox’s $50M BUMP

Cox expects to achieve more than 20% revenue growth in 2004, after hitting $275 million in revenue in 2003.

Charter and Cablevision Systems Corp. are both tracking to surpass $200 million in revenue in 2004.

Time Warner’s Road Runner Business Services unit does not break out revenue numbers, but it has 130,000 customers and a reported 50% growth this year over 2004.

Factor in Comcast — adding thousands of customers a month as it rolls out residential modem service in all former AT&T Broadband properties — and the top cable companies likely produce more than $1 billion in commercial service revenue each year.

The market is a lot bigger than that.

“When we look at our franchises, we see an $8 billion to $10 billion opportunity that exists among businesses out there,” said William Stemper, vice president of Cox Business Services.

Narrow it down to businesses within 100 feet of Cox’s cable plant, that’s still a $3-billion opportunity, Stemper said.

If it approaches $325 million in revenue, Cox is still only about 10% of the way there, so there’s “enormous growth potential,” he added.

“There is really still pent-up demand,” senior vice president of Road Runner Business Services Ken Fitzpatrick said.

Providing higher-speed data services than phone-company counterparts at competitive rates is a key factor executives are relying on to spur growth.

Cable’s steady local presence, at a time when numerous competitive telecommunications providers have come and gone, is another vital attribute.

“It’s about being an outstanding citizen in the community,” Stemper said. Building relationships, following through on commitments and “listening to what customers are trying to achieve in their business” are keys to success, he said.

VOIP PROSPECTS

As cable’s commercial services pioneers look ahead, adding VoIP is squarely in their sights. “Telephony will become part of our bundle,” Fitzpatrick said. “We’re in the process of formulating a business plan for that. You should see VoIP very shortly.”

Time Warner is rolling out VoIP nationwide to residential broadband customers, using Sprint Corp. and MCI Communications Corp. for backbone support and deploying its own soft switches.

Fitzpatrick is evaluating how much of that platform makes sense for Road Runner Business to use. “We will look at customer requirements and feature sets,” he said. “We’ll be looking at existing switches and other technologies. We want to be able to offer a reliable service.”

“Phone is a strategic decision for us, offensively and defensively. It will allow us to offer a full bundle of services,” he said.

Stemper also sees a VoIP opportunity for Cox, even though some customers are already taking phone service from Cox Business Services via circuit-switched plant.

“A lot of customers are starting to invest in PBXs [private branch exchanges] that use VoIP technology,” Stemper said. “We’re looking at how they can leverage that into our network connectivity.”

“We have a lot of markets that had been data-only markets,” he said, and “bringing voice into those markets could be a $700 million to $800 million business potential.”

Businesses typically get voice dialtone in two ways, Stemper said. Some go right to a telecom provider and get the phone lines they need or buy their own PBX switchboard to hook into network trunk lines.

Cox provides both types of services, Stemper said.

Even PBX-based customers will use IP as a transport for both voice and data, and Cox can offer the sheer capacity they need. “They might need general bandwidth because everything looks like data,” Stemper said. “That is a huge segment of customers.”

Charter is testing residential VoIP in St. Louis and Madison, Wis., and will add a commercial services test in the fourth quarter, according to Charter Business vice president Steve Santamaria.

“We see the sweet spot in the four- to six-line business,” he said, because Charter can undercut phone-company pricing. “There is no question there is frustration with the phone companies,” Santamaria said. “We can offer a lower-priced service.”

Ron Tonge, senior vice president of commercial sales for Comcast Online, said the MSO is looking at trialing VoIP to businesses in 2005. “We’ll be a fast follower,” he said, behind Comcast’s 2005 residential rollout of VoIP, which is now being tested in several markets.

VIDEO GROWTH

Providing video to commercial businesses has been one surprising turn of events in the commercial space this year, cable executives said.

“We’ve seen some unexpected increases in the commercial video space,” Fitzpatrick said, on the order of 20%.

Since the terrorist attacks on Sept. 11, 2001, “businesses feel they need to have an information source” in the workplace, Fitzpatrick said. They might have Cable News Network showing in the conference room, professional suites, in waiting rooms or health clubs.

Video provides yet another differentiator from telephone competitors, he added.

Video is also a priority at Charter, specifically a VOD package that’s part of an overall bundled services offer to hotels and motels. “It’s a fairly sizable market,” Santamaria said, and deals typically are made in the five-year range.

“Years ago, we didn’t have much to offer them,” he said. “Now we have a turnkey solution for data” and the company is looking at low-cost ways to deliver VOD to that market.

GOING MOBILE

Wireless technologies present twin opportunities for cable: extending the cable-modem plant through wireless extensions and offering Wi-Fi access in public areas, such as retail centers, stadiums and hotels.

“We have four places with wireless hot spots and 20 [wireless] line extensions,” Santamaria said of Charter’s early work. “We want to make sure we can support it properly,” he said.

The line extensions have now been deployed across Charter’s divisions. “We’re getting employees trained and just launched an incentive program,” Santamaria said. “It really expands our network and conserves our capital.”

Santamaria describes a situation in West Virginia where a building was about one mile from Charter’s physical plant. The cost to extend the cable plant was $35,000 for high-speed access, but using a wireless bypass extension only cost Charter $4,000.

“They were delighted to have it,” he said. “There were three other businesses in that building that subsequently bought the service.”

The Wi-Fi hot-spot rollouts include several universities and hotels. “Usually schools don’t have the budget,” he said. “We can wire the network” for them, he said

Road Runner Business Services also has launched Wi-Fi services. Its Texas systems have been active, placing hot spots around the Alamo Dome in San Antonio during the NCAA Men’s Basketball Championship tournament this spring.

“We try to make decisions on customer demands and our ability to deliver,” Fitzpatrick said. “With Wi-Fi, there was customer demand and a natural augmentation to our business.” He said more than half the 30 plus hotels served by Road Runner’s Austin, Texas, and Kansas City systems have cable-supplied Wi-Fi.

WI-FI IN VEGAS?

Stemper said Cox is using Wi-Fi in couple of niche areas. “We’re studying it very carefully and are still watching to see what the right business model is,” he said. Las Vegas is a strong potential market with the mobile traffic, especially in large casinos. “They are looking to have Wi-Fi capability in their establishments.”

Cox also has some wireless line extensions. “We’ve got quite a few customers we’re serving through wireless extensions,” he said.

Tonge said Comcast also is testing wireless line extensions. “We can reach customers that may not be economical to reach” with wireline technology, he said.

Earlier this year, Charter launched a segmented selling approach, dividing its sales team into segments, creating experts in education, medical, government and hotel/motel, along with a fifth “agents” division. The latter covers outside agents, such as value added resellers or equipment companies like Cisco Systems, which have sales people pitching businesses their product but who may need a broadband partner for connectivity to complete the sale.

“The strategy is paying off greatly,” Santamaria said. “We’re making strides with vendors and customers.”

“We have specialists that mirror [those at] Cisco, Lucent and others,” he said, at the regional level. “We’ve been training the segments to sell to specific verticals and that has been going on for last 90 days. In the past, customers didn’t know who to talk to.”

Along with the vertical sales strategy, Charter intends to go after larger businesses, meaning customers with T1 needs or higher, he said.

GOING TO SCHOOL

“We’re doing extremely well in the education sector, and most of that is fiber based,” Fitzpatrick said.

Road Runner has linked grade schools in Raleigh, N.C., and Shawnee Mission, Kan., with all fiber projects.

“We’ve seen great growth with our fiber business,” he said a growing list of customers want 10-Megabit service or require large bandwidth symmetrical service that fiber provides.

Comcast Online inherited fiber plant in 15 markets, Tonge said, and serves customers there with packages ranging from five megabits to one gigabit. “It’s still a fairly focused business,” he said.

Fitzpatrick labeled 2004 an “execution year for us.” With improvements in the organization structure, back office, enterprise level billing and provisioning systems, “we really can step up from a delivery standpoint.”

Growth is coming from all over. “We’re taking it from the [independent local-exchange carriers], low end dial-up, [digital subscriber line] or telcos,” he said. “We’ve got a great product, and our job is to educate the marketplace on the viability of cable. [It’s about] getting the word out that we are in this space and are a viable competitor.”

“We’re continuing to focus on increasing the amount of product we can layer on. We’re looking to increase our footprint,” into multiple-dwelling complexes, shopping centers and industrial parks, he added.

COX’S 20% TARGET

Stemper said listening to customers is a key to helping Cox achieve its 20% growth rate. “This is a highly competitive environment,” he said. “Customers know what is out there. They know what price points are the right points. They understand the landscape. We become, in their minds, a viable partner to help serve their telecom needs. Businesses are always looking for viable alternatives. They want choices and many they want multiple suppliers at the same time.”

“We can take advantage of our localness, extend that and be imbedded in the commercial side and leverage that in our relationships. We are a strong local supplier that isn’t going away.”

Comcast’s commercial services business rides off what it’s learned from the residential space. “We leverage a lot of the same know-how,” Tonge said. “We’re learning what it takes to scale the business.”

It’s now offering three tiers of service — 1.5 Mbps, 4 Mbps and 5 Mbps of download speed, for $95, $145 and $200 a month, respectively — for small to medium-size customers (with 5 to 200 employees).

Tonge is seeing growth across the board, including the teleworker market as traffic conditions and costs to work in major cities has some employers recommending workers work at home.

Sales people also are a growing market, he said. “Any industry that has a workforce that is on the road, calling on accounts, it works very, very well,” Tonge said. “There’s a tremendous opportunity as industries shift and customers look for different capabilities than traditional companies may be adept at providing.”

Related